The loans that come back to haunt
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The loans that come back to haunt

Environmental legislation is getting tougher and bankers need to study it carefully. The simple act of lending to a company in environmental trouble may make the bank liable. By Christopher Stoakes.

Last October, the Fleming American Investment Trust (FAIT) agreed to pay $4 million to the US Environmental Protection Agency (EPA). This was in settlement of an action begun a year before, when the EPA had launched a $185 million action against the UK-listed investment trust for environmental damage.

There were several extraordinary aspects to this law suit. First, the alleged wrongdoing was almost 100 years old. The damage dated from the end of the last century when FAIT had an interest in a US railway company which involved in the construction of a bridge in Louisiana. One of the other parties involved had a creosote factory. It was the costs of cleaning up that site which had been traced back to FAIT. Secondly, FAIT was a passive investor: it was hardly an industrial concern involved in the manufacture of hazardous substances. Thirdly, FAIT settled the action without admitting liability. This is not unusual but FAIT genuinely believed it was not liable.

The news of the action had knocked off around six per cent of the trust's share price and £13 million off its market capitalization. The continued uncertainty had depressed the share price to less than 70% of net asset value, a much greater discount to NAV than is usual for an investment trust.

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